Securitization and regulatory arbitrage within the ABCT framework
- 439 Downloads
This paper discusses the consequences of securitization and how it links to the Austrian Business Cycle Theory (ABCT). The argument that securitization is behind fiduciary credit expansion preceding the 2008 crisis is incomplete. Consolidated balance sheet analysis demonstrates that securitization per se actually sterilizes the inflationary effect of previous fiduciary credits by transforming them into credits backed by voluntary savings. This sterilization stage is subsequently followed by new fiduciary credits issuance as securitization creates excess reserves and excess capital for banks. However, when securitization is used as a tool to implement arbitrage strategies of the Basel prudential rules, it enables banks to create more fiduciary credit while time preference remains unchanged. This creates the conditions for business cycle amplification.
KeywordsBusiness cycle Deposit insurance Regulatory arbitrage Refinancing Securitization
JEL ClassificationE32 E58 G01 G18 G21
We would like to thank the editors and two anonymous reviewers for their insightful critiques, comments, and suggestions that helped improve previous versions of this paper.
- Ashcraft, A., & Schuermann, T. (2008). Understanding the securitization of subprime mortgage credit (No. 318). New York: noW Publishers.Google Scholar
- Association for Financial Markets in Europe. (2015). AFME Securitisation Data Report, Fourth Quarter 2014. [Online] Available at: http://www.sifma.org/research/item.aspx?id=8589953866. Accessed 20 April 2015.
- Banque de France. (2015). Réserves obligatoires. [Online] Available at: https://www.banque-france.fr/politique-monetaire/reglementation-et-mise-en-oeuvre-de-la-politique-monetaire/mise-en-oeuvre-de-la-politique-monetaire/reserves-obligatoires-presentation-assiettes-calendriers.html. Accessed 16 January 2015.
- Basel Committee on Banking Supervision. (1988). International convergence of capital measurement and capital standards. Basel: BIS.Google Scholar
- Basel Committee on Banking Supervision. (2005). International convergence of capital measurement and capital standards: a revised framework. Basel: BIS.Google Scholar
- Basel Committee on Banking Supervision. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel: BIS.Google Scholar
- Basel Committee on Banking Supervision. (2013). Basel III: The liquidity coverage ratio and liquidity risk monitoring tools. Basel: BIS.Google Scholar
- Basel Committee on Banking Supervision. (2014). Basel III document: Revisions to the securitisation framework. Basel: BIS.Google Scholar
- Bernanke, B. S. (2012). Some reflections on the crisis and the policy response. Remarks delivered at the Russell Sage Foundation and Century Foundation Conference on “Rethinking Finance,” New York City. Google Scholar
- Estrella, A. (2002). Securitization and the efficacy of monetary policy. Economic Policy Review, 8(1), 243–255.Google Scholar
- Federal Deposit Insurance Corporation. (2007). Federal Register, 72(235), 69288–69445.Google Scholar
- Fleischer, V. (2010). Regulatory arbitrage. Texas Law Review, 89, 227–289.Google Scholar
- Friedman, B. M. & Kuttner, K. N. (2010). Implementation of central bank policy: how central banks set interest rates?. National Bureau of Economic Research Working Paper Series, Issue w16165.Google Scholar
- Gertchev, N. (2009). Securitization and fractional reserve banking. In J. G. Hülsmann & S. Kinsella (Eds.), Property, freedom, and society: Essays in honor of Hans-Hermann Hoppe (pp. 283–300). Auburn: Ludwig von Mises Institute.Google Scholar
- Giménez Roche, G. A. (2015). Entrepreneurial ignition of business cycles: the corporate finance of malinvestment. The Review of Austrian Economics.Google Scholar
- Gorton, G. (2010). Slapped by the invisible hand: The panic of 2007. Oxford: Oxford University Press.Google Scholar
- Huerta de Soto, J. (2006). Money, bank credit, and economic cycles (2nd ed.). Auburn: Ludwig von Mises Institute.Google Scholar
- Jablecki, J. (2009). The impact of Basel I capital requirements on bank behaviour and the efficacy of monetary policy. International Journal of Economic Sciences and Applied Research, 2(1), 16–35.Google Scholar
- Kane, E. J. (2012). The inevitability of shadowy Banking. Atlanta, s.n.Google Scholar
- McCulley, P. (2007). Teton reflections. PIMCO Global Central Bank Focus, Issue 2.Google Scholar
- Mises, L. V. (1980). The theory of money and credit. Indianapolis: LibertyClassics.Google Scholar
- Noeth, B. J., & Sengupta, R. (2011). Is shadow banking really banking? The Regional Economist, 10, 8–13.Google Scholar
- Partnoy, F. (1996). Financial derivatives and the costs of regulatory arbitrage. The Journal of Corporation Law, 22, 211–256.Google Scholar
- Pozsar, Z., Adrian, T., Ashcraft, A., Boesky, H. (2010). Shadow Banking. s.l.:Staff Report No. 458, Federal Reserve Bank of New York.Google Scholar
- Stout, L. A. (1995). Betting the bank: how derivatives trading under conditions of uncertainty can increase risks and erode returns in financial markets. The Journal of Corporation Law, 21, 53–68.Google Scholar